George Aubrey – Petroleum Engineer and President of Trailblazer Energy

The players in the SCOOP and STACK plays are touting internal rates of return (IRR) in the 50% to 80% range. What does this really mean AND would a 5% change in the Oklahoma severance tax rate (2% to 7%) make a significant change in the operators decision to drill wells?

This is a basic business school discussion… for projects being evaluated independently (i.e. drill in SCOOP or STACK, or any other project of any kind) the cash flows from new projects must include the effects the the new projects have on existing projects. The simple concept compels financial managers to go back and reevaluate existing projects and helps managers focus on the relevant cash flows attributable to a new project.

IRR and net present value (NPV) are kissing cousins. What the players in the slide deck are saying is that they have made a decision to invest in these areas because their return is very swift and is better than anywhere else, otherwise why invest. Clearly the wells being drilled are fantastic.

So we now need to apply a little common sense. Would an operator decide to exit a play where the return took a 5% hit, assuming a severance tax resulted in a true 5% reduction in IRR (it wouldn’t because of all of the other moving parts, stated above)?

Bluntly, hell no.

The range of IRRs in any one area of either the SCOOP or STACK play is greater than the impact of the 5% delta in severance tax across the board. Translation, they would still drill and wouldn’t blink an eye, even the one with the fake tear.

Most of the arguments against the tax are hollow. If an operator is drilling a very risky, costly and complex project and ends up with a 12% IRR, they have other issues. Assuming the public data in these slides is accurate, then returning to the 7% severance tax rate isn’t even a blip on their radar.

Restore Oklahoma Now, Inc.

Small oil producers, state educators push for

Gross Production Tax ballot initiative

Measure would call for 7 percent GPT, teacher pay increase

OKLAHOMA CITY – An organization representing small independent oil producers, educators and concerned Oklahomans is drafting language for a state ballot initiative with the dual purpose of restoring the state gross production tax to a flat rate of 7 percent and addressing the state’s teacher crisis.

Restore Oklahoma Now, Inc., is a newly formed nonprofit that has engaged a law firm and is working to raise $3 million with the goal of getting a state question on the general election ballot in November 2018. Organizers of the group have hired Mickey Thompson, former president of the Oklahoma Independent Petroleum Association (OIPA) and long-time oil industry spokesperson, to head up the campaign.

The focus of the initiative petition will be two-fold, said Mike Cantrell, chairman of the Oklahoma Energy Producers Alliance (OEPA), a group of small, independent oil producers who have advocated for a restoration of the gross production tax for more than a year and one of the organizational leaders of the new coalition.

“We think it’s a matter of fairness to Oklahomans that all oil and natural gas production be taxed at a flat and competitive – with other states – rate that helps sustain essential state services, especially addressing our teacher crisis and teacher pay. Our petition will restore the historical 7 percent GPT immediately on all wells, in other words repealing all the current tiers of state oil and natural gas production tax,” Cantrell, an Ada oilman, said.

“Further, we will lock-box the additional proceeds from this restoration for teacher pay and for rehiring thousands of teachers to address the ongoing shortage of qualified teachers.”

Thompson said the current discussions at the ongoing legislative special session are a mere bandage on the state’s budget crisis.

“The idea this legislature would hike the GPT only on new wells from 2 percent to 4 percent will generate less than $20 million a year to the state,” he said. “It doesn’t scratch the surface of the need to address the education crisis. Our petition will repeal all the special GPT tiers immediately. Our petition will truly level the playing field, 7 percent on all production, period.”

Thompson said the Oklahoma Tax Commission has stated that a flat, 7 percent GPT last year would have generated about $725 million for the state, which is $440 million more than was collected under the four-tiered system now in place.

“It’s a shame that concerned citizens must go to the people to address the state’s various crises,” Thompson said. “Our legislature has failed to take appropriate action. We feel there is no other option.”

Cantrell said response to early fundraising for Restore Oklahoma Now, Inc., has been encouraging.

“We have commitments of $700,000 after one week. We think as other groups and individuals join our coalition, we will reach our goal. Obviously, with this much money at stake, we expect strong opposition from those companies who have enjoyed this special tax break for several years,” he said.

The following PowerPoint presentation illustrates research findings conducted by WPA Intelligence in a statewide study among 2018 likely voters in Oklahoma regarding the oil and natural gas industry. Specifically, this research demonstrates strong support for the restoration of the Gross Production Tax to 7% on all oil wells, preferred areas for the funds from the tax to be spent, and the impact the oil and natural gas industry has on Oklahoma.

Representative Jon Echols replied that our last sentence in our top 10 reasons to raise GPT letter was in need of correction. We always intend to be accurate and we missed one here. We said: “It’s disingenuous to call the negotiation which resulted in the 1% rate going to a 4% rate a tax increase. It was sunsetting and would have gone to 7%. So in practicality, it was a tax decrease.”

While there was no intent to mislead, it was a misstatement of the facts that we wish to correct. The negotiation that resulted in the 1% rate going to 4% was additional tax revenue and the 4% rate will still go to 7% after the original 48 months from the drilling of the wells. So the best case scenario is that a well drilled June 30, 2015, would still have a 4% rate for only 24 more months, at which time the rate would increase to 7%. We stand by our position that this was a trade-off to protect the 2% rate without giving up much in reality.

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1. Even at 7% GPT, Oklahoma’s effective rate on oil and gas production would still be the lowest overall tax rate of any major oil and gas state. Much of that is due to the fact that Oklahoma doesn’t levy ad valorem tax on oil and gas minerals in place. Almost all other major producing states do have property tax on minerals.

2. Oklahoma is home to two of the most prolific and economic world-class oil and gas players (Scoop and Stack). Public oil company presentations inform us that these Oklahoma plays have the lowest break-even cost (+/-$24.40/barrel). These oil and gas assets will be drilled regardless of a marginal increase in the tax rate.

3. Using companies own reporting numbers rate of returns are as high or higher than in North Dakota (May 2017) – and comparable to Texas; there is no need for a 2% tax rate.

First-year returns reported as:

ND Bakken – 40-50%

Okla Stack- 100%

Okla Scoop-70%

4. Changing the 2% rate to 7% would impact only a small number of taxpayers, most of whom are the same big oil companies that pay the higher rates everywhere else.

5. If having a 2% tax rate is so crucial to big oil company profitability, why aren’t these same companies threatening to pull out of North Dakota and Texas? Why aren’t these companies moving their headquarters or their major drilling operations to Oklahoma? Why aren’t the big oil lobbyists descending on the North Dakota and Texas capitals threatening them with leaving if they don’t lower their rate to 2%?

6. There is absolutely no correlation between tax rates and the rig count! You drill where the oil and gas is!

We get the same economic benefit from a 7% rate as a 2% rate.

7. This tax break for big oil producers vs small, vertical producers is 71.4% (the difference between 2% and 7% tax). Most of this massive tax subsidy goes to out-of-state stockholders, investors, foreign companies (partners) and even foreign governments. So Oklahoma really doesn’t get a significant bump from the multiplier effect of a low tax rate.

8. Horizontal frack jobs are destroying hundreds of marginal, but still profitable vertical wells which pay a 7% rate. (Damage to 451 wells has been documented in Kingfisher County alone!)

9. Horizontally fracked wells recover 60-80% of all the oil and gas within the three-year period of the 2% rate. With low oil prices, we are incentivizing the accelerated taking of a valuable but finite resource at low prices. Whatever happen to conservation and allowables?

10. Bottom line, this massive tax subsidy is a fairness issue. Why should operators of 2,000-6,000 barrel per day wells only pay 2% when low-volume stripper wells, most only marginally profitable at today’s prices, are just hanging on… and must pay 7%?

Speaking of fairness, horizontal drillers championed the repeal of several minor tax provisions which meant nothing to them just so they could claim that their taxes have been “dramatically” raised already. It’s disingenuous to call the negotiation which resulted in the 1% rate going to a 4% rate a tax increase. It was sunsetting and would have gone to 7%. So in practicality, it was a tax decrease.

Your call to action is:

Call Governor Fallin at (405) 521-2342 and ask her to support restoring the 2% GPT to 7%.

Big oil companies CEOs fly into OKC in their corporate jets and their $5000 Armani suits and hold press conference after press conference boasting about getting 2000-6000 barrel per day wells. They talk about how the Stack and the Scoop are the best plays in America with the lowest breakeven cost ($24.40 per barrel) and some of the best production rates.

Then they sell the Oklahoma legislature that they’re going to invest billions in taking more of a vital but finite Oklahoma resource at low oil prices; but only if they get to keep a 2% tax rate.

The cruelest and most cynical of all hypocrisies is to brag about how good our resources are but then to scare Oklahoma citizens by threatening that unless they get to pay a 2% tax rate they will take their rigs and go home!

We are waiting to see them tell the North Dakota and Texas legislatures that unless they lower their rates, from 10% and 8.5% respectfully, to 2%, that they will take their rigs away. Honestly, that would generate a good laugh in those states.

We should call their bluff. There are companies trying feverishly to get in on our oil plays.

Now mind you, every stripper well in the state pays 7% and the best rate for new wells anywhere else they drill is 8.3% (10% in North Dakota)!

It’s like we should all bow down and worship them for taking our resources on the cheap while our schools are bleeding teachers and our infrastructure crumbles.

The Oklahoma Energy Producers Alliance, made up of small oil and gas producers living all across Oklahoma, has commissioned a poll that shows that 67% of all likely voters (and 57% of Republican voters) want the 2% raised to 7%.

Our legislative leadership will likely listen to the Daily Oklahoman when they try to compare this poll result to a similar poll result on the sales tax initiative. Thats like saying the Dallas Cowboys have no greater chance of winning the Super Bowl than the Ada Cougars just because they both play football! The sales tax increase would have hit everyone. Restoring the 2% tax to 7% only cost the companies making out like bandits, who have no way to pass the cost on to the voters. This should be a no-brainer!

WC Fields said, ” if you look around the room and can’t spot the chump, it’s you!” The Oklahoma legislature is looking for the chump on a daily basis.

Perhaps it’s them!

We don’t even know if these companies are taking the 5% subsidy and funding their drilling in states where they pay a higher rate than they would here if the tax was restored to 7%.

By the way, to add insult to the injury, they are destroying hundreds of existing vertical wells that were paying 7% with their massive frack jobs! (451 in Kingfisher county alone)

Let us introduce you to Donelle Harder. She is the VP of the Big oil association in Oklahoma.

Below you’ll find her comments to a guest post (link) from a former industry insider who advocated for 7% GPT across the board and our response. Please reprimand us if we ever try to pull the wool over the public eyes like this.

They know that the rebates in Texas have no effect on the wells like they are drilling here.

The same similar rebates which we gave up voluntarily in Oklahoma last year also didn’t apply to their new horizontal wells; just to ours!

It’s time they put their skin in the game and agree to a 7% tax rate, which is still lower than the effective rate anywhere else they drill; and pay our teachers.

Donelle Harder:

In the meantime, here are all the different rates and incentives Texas offers for the gross production tax rate, so that people can look into it themselves. Oklahoma has ended all 11 gross product tax rebates over the past three years. As of July 2017, there are ZERO rebates to GPT in Oklahoma, unlike the several offered by Texas that drive down the overall rate of 7.5% to 3.7%. https://comptroller.texas.gov/taxes/natural-gas

Donelle, in full disclosure, folks should know you are the VP of the big oil lobby in Oklahoma.

Your response cannot have been sent from a position of a lack of knowledge. So it’s purpose must have been to mislead and confuse.

Yes, there are rebates in Texas. But none of them would apply to the wells drilled in Texas like are getting the 2% rate in Oklahoma. The rebate on gas is only on pure gas wells – those not coming off oil wells- and only then if the well makes less than 90mcf per day.

Virtually none of the horizontals being drilled in Oklahoma meet this criteria as they are either oil wells producing casing head gas or high condensate wells. And they make more than 90 mcf per day for the 3 years they get the 2% rate. On oil, the Texas rebate is virtually irrelevant. It only applies to wells making less than 15 barrels per day and then only if oil is less than $30 per day for three consecutive months. This entire argument is bogus!

But you know that! You just think Oklahomans are too uneducated to figure it out; which they will soon be if we continue to bleed teachers and fall even further behind in the education of our children.

We are on opposite sides of this issue but it is painful to watch an important segment of our industry using messages that are blatantly wrong hoping no one notices.

We want you to be better than that.

http://okenergyproducers.org/wp-content/uploads/2017/05/bigstock-A-Small-Private-Oil-Derrick-Pu-144556856.jpg675900Naomi Lemonhttp://okenergyproducers.org/wp-content/uploads/2016/07/Logo-sm-296x300.jpgNaomi Lemon2017-09-18 15:12:092017-09-18 17:56:48Rebates in Texas would not apply to the wells like they are drilling in Oklahoma

Here is an example of what the 2% rate is costing Okla in tax revenue in just 2 sections,- and that’s at $45 oil. This is almost criminal!! It also demonstrates how difficult this is to put in plain language every day Oklahomans can understand. Oklahoma reminds me of the brother Esau in the Old Testament story of Jacob and Esau. As I recall he sold his birthright for a bowl of stew. We are selling our states birthright on the cheap!

OEPA

This article was sent to us by Steve Altman, a Petroleum Engineer and President of Brown and Borrelli Inc.

It talks about the Devon well completed for 6000 BOE/d. On the second page, next to the last paragraph, Devon talks about their increased density pilot (Showboat) coming up in the third quarter where they plan to drill 25 – 2 mile lateral wells in sections 3 and 10 T16N R9W, landing in two upper Meramec intervals, one lower Meramec interval, and the Woodford. This would make 6 wells per level, which would match their talk at the SPE luncheon a couple of months ago where they indicated 5 wells per landing zone, in their opinion, was not enough.

When you figure 25 wells and the payment is $2500 per acre, you are talking about $100 per acre ($200 for the 2 mile lateral) for a well that is making 6000 BOE/d. That is a heck of a deal for them.

And the State of Oklahoma keeps taking it in the shorts on taxes. Assuming $10,000,000 per well cost, and assuming the wells only break even, which takes $13,000,000 after taxes and royalty and operating, the gross income is $325,000,000. The 5% GPT we lose is $16,250,000 in just these two sections, with 50% to 75% of that coming in the first three years.

It once again confirms what Joe Warren and others have been shouting from the rooftops: Forced Pooling is being used to artificially hold down lease prices.

Since the STACK play is now being talked about as an equal in quality to the Eagle Ford and Permian plays, the only difference in prices is Forced Pooling in Oklahoma.

The Disintegration of a Petroleum Association

Dewey F. Bartlett Jr. Is a lifetime OIPA board member, former mayor of Tulsa, Former Chairman of OIPA, Former Chairman of the Oklahoma Energy Resources Board, former Chairman of the National Stripper Well Association and a leader in the Oil and Gas industry in America. For OIPA to demand that he resign his “lifetime” position on the board would be like asking Will Rogers children to give up their Oklahoma heritage.

Dewey Bartlett Sr. was the Governor and U.S. Senator of Oklahoma as well as a founding board member of the OIPA. The late Senator Bartlett coined the term “stripper well” in the American consciousness and passed significant legislation to save Oklahoma’s valuable natural resources.

We have no quarrel with the OIPA, even though we disagree on their responsibility to our state and to its conventional legacy producers. We might suggest they change their name to more adequately reflect who they represent to the “Oklahoma Horizontal Well Association.”

Recently Adam Wilmoth at the Daily Oklahoman wrote a very well written piece on the landmark benefits of legislation (SB867) that allows horizontals drillers to drill laterally for more than a mile, for the first time ever: Oklahoma oil fields gain recognition.

The article touts as facts two assertions that we question.

The first assertion is that now companies can drill 2 miles laterally in any formation for the first time ever. That is just not factual.

The article also asserts that this bill will create a tremendous economic boom for our state. We believe that to also be inaccurate.

It is accurate that horizontal drilling combined with massive Hydraulic Fracking has allowed us to produce more oil and gas “quicker “creating another “boom” in the Oklahoma oil fields. (This is with $40 oil and a 2% tax rate but that’s another subject)

That has already happened; before the “so called” long lateral bill.

Horizontal drillers could already drill two miles in any formation- and many did. All they had to do was to stack a 320 acre tract on top of another 320 acre tract to create a rectangular 640 acre unit that is two miles long but only 1/2 mile wide.

So, if the industry wanted to drill a 2 mile lateral and they could already, why did we need legislation?

The answer is legislation wasn’t needed to drill 2 mile laterals. Legislation was needed to take more than 640 acres at a time by a process that only occurs in Oklahoma known as “forced pooling”.

So, SB 867 was not a “drill long laterals” bill. It was a “get more acreage bill”.

What they can do now that is different is take twice as much acreage as before using the power of the state to “force pool” (which is like subsurface eminent domain executed by the state for private interest).

Let us explain.

Oklahoma is the only state that has a process that allows drillers to use the state to set values and terms for mineral acreage. In all other states terms are negotiated between mineral owners and drillers. That is why Texas mineral owners get up to ten times more for their comparable minerals and a larger percentage of the production than in Oklahoma. You cannot force a mineral owner to let you drill in Texas. You must come to terms. Texas mineral owners are not smarter or better negotiators than we are, they just get to make deals without state interference.

Oh, one more slight correction. The article asserts that this new ability will generate tremendous economic growth.

How does it generate more economic benefit when it requires fewer rigs, which means fewer jobs, allows drillers to hold more acreage without paying mineral owners more, and even results in fewer wells drilled and less acreage drained?

We are sure you could pay for some study to show how that works, but it seems to defy common sense.